France’s final services PMI for July was 48.5, lowered from a preliminary 49.7, according to HCOB data. This drop was also seen in the composite PMI, which decreased to 48.6 from an initial 49.6 and a previous 49.2. The French services sector faced challenges in July due to low demand and staffing shortages. While GDP growth was at 0.3% quarter-on-quarter, largely from inventory changes, there are worries about maintaining this growth rate.

Decline in Business Expectations

New data indicates that the French service sector is close to growth levels but saw a slight decline in July. Continued weak demand and slow decision-making caused by political uncertainty and international trade tensions have impacted business expectations for the coming year. In July, there were fewer backlogs and reduced future business expectations, contributing to a tough environment in the services sector. Employment numbers fell, with fewer temporary contracts being renewed and no replacement for voluntary departures. Regarding prices, input costs mildly rose due to increased wages and prices for intermediate goods. However, output price inflation remained steady, reflecting cost pressures and efforts to boost revenue growth. The downgrade of France’s services PMI to 48.5 indicates a contraction and a shaky start to the third quarter. This is worrying since the services sector makes up a large part of the French economy. Recent labor stats show a rise in the unemployment rate to 7.7% in the second quarter of 2025, undoing some earlier improvements.

Market Outlook and Strategies

With weak demand and disappointing business expectations, we expect downward pressure on French stocks. Traders should consider protective measures, such as buying put options on the CAC 40 index. This strategy could be profitable if the index falls in the coming weeks as corporate earnings forecasts are likely to lower. Slowdown in France’s economy, the second largest in the Eurozone, may also put pressure on the euro. The EUR/USD pair dropped below 1.07 in late July 2025, and more declines seem likely. The European Central Bank might need to adopt a more cautious approach, especially compared to the Federal Reserve’s recent hawkish statements. On the other hand, this economic slowdown could benefit French government bonds. As concerns about growth outweigh worries about inflation, demand for the security of sovereign debt could increase, leading to lower yields. We are monitoring the spread between the French 10-year OAT and the German Bund, which expanded during the political uncertainty following early 2025 elections; it may narrow if recession fears take hold. The mix of political uncertainty and a worsening economic outlook suggests that market volatility could increase. We saw the Eurozone’s volatility benchmark, the VSTOXX, spike amid market turmoil in June 2025. Traders might think about buying call options on the VSTOXX to hedge against unexpected market movements in the upcoming month. Create your live VT Markets account and start trading now.

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